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Understanding the Face Value of a Share
The face value of a share is the value assigned to it when it was issued. The face value of a share in the Indian stock market, for example, is the amount in rupees printed on its certificate. If you want to buy or sell shares in an Indian stock exchange, this is the price you will be quoted.
Watch What is Face Value, Market Value, Stock Split?
What is the Face Value of a Share?
The face value of the share is the company's net worth at the price of the share on its first day on the stock market.
Face value is the value of a share at which it can be bought or sold. If you look up the current price of a company's shares, that will differ from the face value. The difference is made up of accrued interest (or dividends) since the price changed and whatever fee your broker charges you to make the trade.
The face value is also called par value. If you bought stock in a company, they would pay you this par value, usually by sending you a check. That was how "stock" got its name, originally meaning "certificate showing ownership of stock."
The face value does not reflect the share's current market price. For example, if good news about a company's products were to be announced, then the valuation of face value would increase. If terrible information about a company's products were to be announced, then the valuation of face value would decrease.
How Does the Face Value of a Share Denote its Worth?
There is no such thing as the face value of a share. The only valid question is, what is it worth?
If you want to buy a share in a company, you need to know its value. If you're going to sell a share, you need to know its value. If you want to invest in a company, you need to know its value by buying shares.
The face value doesn't help with any of those questions. It's not a valuable piece of information.
A share has no "face value" because it has no intrinsic worth at all. A share is just a contract between two people: whoever owns the share now owns the right to be paid some of the future profits from that company, and the company gets to use that money now.
How Does the Face Value of a Share Matter to an Investor?
If you get a share and want to sell it, the person who buys it from you will get the same rights as when you purchased it. If the company goes bust, they'll get nothing. In between, they'll get whatever dividends the company pays them, and they'll have a vote at the shareholder meetings.
As a shareholder, your job is to think about whether or not that sounds better than whatever else you could do with your money. The dividend will be whatever the company makes after paying all its expenses and taxes. The voting rights will be whatever influence you think the votes will have on the decisions made by whoever runs the company.
What if There Were No Shareholders? What Would be Different?
The main difference would be that the company's people wouldn't have to pay attention to anyone but their employees and their customers.
The shareholders only care about how much money they're making. So if there were no shareholders, companies would mostly be run for the benefit of their workers and their customers—which most companies claim to do anyway.
How Does the Face Value of a Share Affect the Stock Market Decisions?
When a company issues a share of stock, it sells the share to an investor. In return, the investor gets several rights, including the right to vote on significant issues affecting the company and the right to receive dividends from the company's profit.
Today, stock comes in two flavours: common stock and preferred stock.
A common stock gives you a claim on a company's assets and earnings. If all goes well, you might get rich if the company becomes more valuable over time. But if things go badly, you might lose your investment.
Preferred stock has a fixed value and pays a fixed dividend. No matter what happens to the company's value or its profits, you will get your money back when your shares mature, and you can collect your dividends from then on.
If you want to invest in the stock market but don't want to try your luck with individual stocks or mutual funds, you can buy shares of an index fund.
This is a mutual fund that tries to match the performance of a stock index, like the S&P 500. (Technically, there are two types of index funds: Total Market Index Funds and Broad-based Index Funds. The difference is in how they define "market." Broad-based indexes include small companies; total market indexes do not.)
How Can the Face Value of a Share Influence Your Investment Decisions?
If the company managers decide that it would be a good idea to raise money by selling shares, they do so by selling their ownership stake to someone else. In practice, this almost always means selling it to a large number of individual investors. But the company's shares are only worth the same as the value of its assets divided by the number of shares.
The face value of shares is typically much less than their market value -- typically less than 1% of their market value. So when you buy or sell shares, you will almost always be paying (or receiving) a price that is very different from their face value.
The difference between these two numbers -- the price you pay and the face value printed on the certificate -- is called "par value." The par value of a share has nothing to do with its actual market value; it's just one number that was chosen at random (often years ago) when the company was created.